Categories: Business

4 Financially Smart Rules That Every Investor Should Follow

I get it. Investing is hard. There is so much information out there. There are blogs, television networks, books, newsletters, and websites, all teach completely different strategies. It is difficult to know which strategy or what rules are the best ones to follow, and even more importantly, how do you take those strategies and put them to work to actually help you become a successful investor?

Like any niche or business, mastering the basics and having a strong understanding of fundamentals is key, especially when things do not go according to plan. The same is true for investing. The market can be unforgiving at times, even to the most experienced investors on Wall Street.

And when those unforgiving times do come, there are some rules all investors should look at to get them pointed in the right direction again. Let’s review four smart rules every investor should follow if they consistently want to be in the game.

1. Focus On The Future

Markets move and prices fluctuate all day, every day. [pullquote]Markets have been bouncing up and down every single day since the New York Stock Exchange was founded on March 8, 1817, and they will continue to fluctuate forever.[/pullquote]

Knowing prices will rise and fall over the long run allows investors to look at small price movements as small sample sizes as a part of an overall much longer term outlook. As investors, we always have to be focused on the future as wealth is not created overnight. Wealth, in the stock market, is created over the course of many years and even decades.

An excellent tip to make sure we are constantly focusing on the future is to ask yourself a simple question when prices move against your positions in the short term. Ask yourself, “Do these short term moves affect my long term outlook?” Most of the time, the answer will be no, and hopefully, you would have been able to move past the short-term fluctuations.

2. Be Open Minded

Plenty of investing strategies that used to be successful no longer work according to plan. What has worked in the past may not work in the future, and as investors, we must understand that as markets change, so must we.

The New York Stock Exchange currently trades stocks for over 2,800 publically traded US companies, while the Nasdaq lists 3,300 companies. Together, these exchanges and others, list and trade thousands of stocks every single day.

Having that many stocks available to be traded each and every day mean there are opportunities in companies we may have never heard of before. Just because we have never heard of those companies before does not mean they cannot be the next Microsoft or Apple.

As investors, we must be open-minded and be able to see an opportunity for what it is and not where it is coming from. You don’t want to be kicking yourself because you missed out on a great investment because you weren’t willing to be open minded!

IMAGE: PEXELS

3. Always Be Diversified

Being diversified could be the difference between a winning and losing month or year. That’s how important diversification is.

Diversification is the concept of owning stocks in all different assets classes and sectors. Owning a few financial companies, combined with a few technology companies, a few commodity companies, and a few international companies, will allow you as an investor to stay in the game longer because you have spread out your risk.

[pullquote]Another excellent way to make sure your risk if spread out and you have a diversified approach to investing is through ETF’s.[/pullquote] ETF’s, like mutual funds, create low-cost diversified products for anyone to invest in, and the managers of these products create these diversified products for you.

The difference between ETFs and mutual funds is that ETFs trade like stocks, where anyone can buy or sell shares while markets are open. Being able to buy and sell at will allows investors to choose the price they want when entering an investment. Mutual funds, however, only allow transactions to take place in the last few minutes of the trading day.

4. Do Not Go All In At Once

Sometimes, we see an offer that is almost too good to be true. And most of the time, if it is too good to be true it probably is!

It is challenging to time investments perfectly and even those most successful investors in the world are wrong from time to time.

Dollar cost averaging is an excellent strategy if we accept that we will not always make our investments or trades at the perfect time. Dollar cost averaging allows us to invest small chunks of our eventual investment size in order to add to our investments at better prices if the market does not immediately go in our favor.

As a rule of thumb, we recommend buying in quarters. Buying in quarters allows you to avoid experiencing morale-crushing pain from not having perfect timing for an investment. If you see an opportunity that you would like to act on, take your normal trade size and divide it by four. This is going to be the new initial size of your investment. If the investment goes your way, great! A small gain is significantly better than any loss!

If the trade goes against you, have no fear! You still have 75% of the money you normally would have used to invest in that opportunity available to add to your current position at better prices!

Wrapping Up

Investing is hard enough, but following these four smart rules will allow you to not only stay in the game longer but have an easier time profiting while at the same time reducing your risk.

If we focus on the future, we can make sure we do not let the small price fluctuations that occur from day to day affect our long-term outlook and goals.
If we are open minded, we can be introduced to many different investing opportunities in stocks, ETF’s, or companies we did not even know existed.
If we are diversified, we can have confidence that our risk is spread out amongst various asset classes, all of which move independently from one another.
If we keep the dollar cost at an average by buying in quarters, we can have more money to invest at better prices if we do not time the market perfectly.

Following these four rules will get you back to the tried and true methods that all successful investors have used to keep themselves ahead of the pack! Do you have any more rules that investors should follow?

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